In a recent decision, Austria's highest court for tax litigation dealt with the treatment of losses of a foreign permanent establishment under a tax treaty which provides for the exemption method for avoiding double taxation. In its decision, which deviates considerably from the court's former rulings and indicates a new reasoning independent of EC law, the court concluded that a loss sustained by a foreign permanent establishment may be offset against the taxable profits of the head office in Austria. This article examines the court's decision and analyses its impact.